(“We will open the bidding for a UFC 149 pay-per-view purchase at $49.95. Do I hear $49.95? What if I said I’d thrown in this *authentic* jersey, completely free of charge? $49.95…anyone? OK, how about ten bucks?”)

Recently, after reading 12OzCurl’s article (well, just the opening paragraph) I came to a realization that the only reason why I’m here is because I’m Asian and Benny figures that must mean I’m good with numbers. So break out your abacuses…this shit is about to get real.

Today’s class? Variable pricing and whether or not this system should be adopted by the UFC in regards to the pricing of pay-per-view events. I’ll wait for everyone to decide whether or not to skip this article and go straight to the “Hot Potato” links.

Still with me? Probably not. But anyways, here we go.

For those that don’t know, Variable Pricing (or Dynamic Pricing as it is called) has been the main pricing strategies for airlines and hotels on how they price their own inventory. Recently, the San Francisco Giants adopted this form of pricing in order to better optimize ticket sales for their events. The strategy is similar to that used by the hotel and airline industry where prices go up and down depending on current market conditions and historical trends. Did it work? Hell yeah it did. By using sell-out history from past games based on opponents, starting pitchers, weather, day of the week, evening versus afternoon, and of course, current supply, the Giants were able to significantly increase their ticket sales revenue to such a degree that other franchises are looking to adopt similar methods to pricing their games.

For the actual pricing of live events, this really doesn’t make any sense. The UFC really isn’t in the same spot on a regular basis for this type of pricing to make sense. Any city the UFC visits, it is considered a major event and will most likely sell out regardless of any other variables that may come into play. Since live events are constantly moving from one city to another, there is no localized sample of potential buyers to track buying trends in order to utilize a dynamic pricing strategy. However, this could be applied to pay-per-view pricing for events.

Before I go any further, here’s some numbers calculated from 2008-2012 that you may find interesting.

(*List compiled based on fighters with a minimum of 4 or more appearances in the main or co-main event)

Whether you blame the injury curse of 2012 or the influx of UFC events over the course of the year, last year has seen a tremendous a decrease in pay-per-view buys. Since 2008, the UFC saw a steady increase in buys up to 2010 before dropping 27% in 2011. The following year, there was an additional 27% percent from 2011-2012. Overall, since 2008, where the total pay-per-view buys that year was over 9 million, the UFC has seen a 42% decrease in buys over the past 2 years.

Could there be an issue with supply and demand? Absolutely. In both 2008 and 2009 fans saw a total of 20 events (both free and pay-per-view) and 2010 had 24. In all three years, the ratio of PPV vs. free events was roughly 3:2. Flash forward to 2012, and you’ll see a total of 32 to events and the ratio of PPV to Free events shift to roughly a 2:3 ratio. Last year we saw a total of 18 free events compared to 14 pay-per-view events (it would have been 15 if it wasn’t for you know who not wanting to fight you know who and pissing off you know who…oh, how that seems like ancient history now). Still, the number of pay-per-view events last year was less than the number of free events. Why bother paying for an event, when there are plenty of other events being featured on free TV? Add in Bellator on Spike and the World Series of Fighting on NBC Sports and now the UFC has even more competition to deal with. You could also argue that the new deal with Fox may have resulted in the UFC cannibalizing themselves with all the events on Fox, FX, and FuelTV.

One thing the UFC has done right is airing international events on free TV and not on PPV. The numbers show that events not held in the North American continent are more likely to be 44% lower than the 5 year average. Those “marquee” events in Brazil, Japan, and Abu Dhabi? They also netted numbers below the PPV average.

There are a few things to note here (or “limitations” as we in the scholarly world like to say). All of these numbers are provided by the UFC and are rough estimates as opposed to actual numbers. That said, it’s safe to assume that these numbers, while just estimates, provide a good baseline for this study.

Could dynamic pricing work for PPV events? Possibly. Of course, there is the logistic nightmare of having to reprice events based on injuries that may occur leading up to the date. There’s also the perception that the UFC may be “cheapening” their image by pricing certain events lower than others. How this may affect certain fighter contracts that receive a percentage of the PPV buys is also something to take into consideration.

All things considered, should PPV events featuring non-title fights be priced the same as those that do feature a title fight? After all, in such cases where a title is on the line, more is at stake and could be considered a higher value compared to those where a title is not. Should Mir vs. Cro Cop be priced the same as Lesnar vs. Velasquez? Should the heavyweight main-event fights be priced higher than the lighter weight divisions? If Penn vs. Diaz was priced lower, would they have netted a buy-rate closer to the average? Would main-events featuring Frankie Edgar be better off priced at a discount rate compared to other events (you’re still my boy, Frank)? How will the new Fox Sports 1 and Fox Sports 2 affect the current rate of free vs. PPV events for the UFC?

At the end of the day, the ultimate question will be what will the consumer be willing to pay for what event? In other words, would you be willing to pay more than $44.95 for GSP vs. Diaz this weekend? How much will you pay for UFC 161?

Cagepotato Comments

Showing 1-25 of comments

The decline in PPV numbers are due to a few combined factors. First there are way more PPV events in recent years then there were in the past. Second the price of PPV is ridiculous, and third with MMA coverage on the internet being so readily avaliable, I can skip an event and read up on what happened as it goes down. Fourth fighters are so worried about winning they would rather lay and pray on someone for the win instead of putting on a good fight. To me not worth 50 bucks to see GSP dry hump someone for 25 minutes.

danomite- March 13, 2013 at 9:51 am

@O-chan the ppv events aren't a sunk cost in that, to my knowledge, the UFC has no contract with any venues that require them to put on a certain number of events per year like they do with televised events. If Dana feels like he can make the same amount of money putting on one show instead of 2 shows he'll probably choose doing one. Even if there is no difference to them financially between the two options, there is still the human costs associated with an entire crew of employees having to spend time on the road, away from their families every other week. I'm sure all this traveling is starting to wear on Dana too, especially with his Meniere's disease. There is also the chance that more ppv events could have a negative effect on total PPV buys, which seems at first glance to be the case over the last few years, but this is more likely due to the sudden appearance and then disappearance of Brock Lesnar. I am, of course, going under the assumption that the UFC doesn't turn any kind of profit from the ticket sales/sponsorships that come with airing an event. It could be the case that they make a ton of money off those things, but I've always heard that the the profit in the UFC almost entirely comes from PPV sales.

cman- March 13, 2013 at 9:21 am

I believe you Chen. Except that's gate sales. This is PPV. One is finite, the other is theoretically not.

cman- March 13, 2013 at 9:14 am

FUCK. I suddenly feel like a baseball fan and should be arguing OBP vs RBI production vs lefties or some other worthless stat.
GSP sells, no matter how much fan boys whine about over strategy and lay and pray.
Hendricks doesn't, even as he KO's Fitch. And his rennasaince festival Viking beard won't help fix that.

rickards- March 13, 2013 at 9:12 am

I stopped reading after 42%. why are my numbers different?

cman- March 13, 2013 at 9:07 am

Understood which is I guess my point. The variables would become so complex I can't see a practacle application. I love managing by numbers, I also like the idea of discounts to expand viewership. I could compile a list of zero draw fighters who would greatly benifit from past opponents (Fitch leading that charge) and would actually probably benifit even from some of the negative effects like replacement fights. That's the step in the process I can't get past.
And dano showing that they might already be at market equilibrium. Viewership growth following discount shrinkage would be a mountain to climb in real dollars.

O Chan- March 13, 2013 at 9:16 am

Believe it or not, there are even more complex variables in other industries like hotels and airlines. The SF Giants have everything from who the opposing starting pitcher is to the type of weather they are having that day and are adjusting prices right up to the first pitch.

The12ozCurls- March 13, 2013 at 9:06 am

In the top photo - Why does GSP (in the background) look like he consulted with one of the "Real Housewives of . . . . ." on bad Botox injections. Yikes!

P.S. - Thanks for the shout-out Ollie.

O Chan- March 13, 2013 at 9:26 am

We're in this Tijuana nightclub from hell together, brother.

O Chan- March 13, 2013 at 8:59 am

Also, regarding buying 2 half-priced events in lieu of 1 big event, the problem with cost-based pricing is that the events are going down regardless of how you price the PPV events. In other words, it's a sunk cost, you're going to make money or lose money regardless and it shouldn't be your main focus on how to price the event. What should be the focus is how to maximize the buys. Another thing to take into consideration is the sponsorship sales. While PPV sponsorship sales (whether those video game/movie trailers or the brands featured in the cage may not be guaranteed based on impressions, an increase in buy-rate could be leveraged to an increase of CPMs for sponsorship sales when negotiating rates.

Alan K- March 13, 2013 at 8:56 am

Where is that bar graph on the front page? I want to get a better look at it.

O Chan- March 13, 2013 at 8:54 am

There would actually be more variables that go into that. For instance, who else is on the card? When is the card taking place? Events on holiday weekends yield a smaller buy-rate than events on non-holiday weekends. Certain months yield greater buy-rates than other buy rates. How much promotions have gone into the event? Were their changes made to the PPV card due to injuries? While I get your simple assessment, there are more variables involved with the price structure of an event than just who is the main-event. I wish it was a simple apples to apples comparison, but in reality, it's apples to oranges to bananas to acai.

danomite- March 13, 2013 at 8:54 am

where were these fucking spreadsheets when I started writing this goddamn thesis?

danomite- March 13, 2013 at 8:51 am

First off, the television deals have pretty much set in stone the number of free televised fights the UFC has to put on each year, so the only way they could mess with that 2:3 ratio you mentioned would be to increase the number of pay-per-view events. They're already averaging more than one event every two weeks so that's not likely to happen. Secondly, you're ignoring that the UFC's PPV revenue isn't equal to the number of PPV buys, it is equal to buys multiplied by price. Just to show you what I'm talking about, using your average buy rate of 526000 at 45 dollars a pop, you get revenues of 23,670,000. At just a five dollar discount (roughly 11% discount) you would have to have 591,000 people buy the PPV to get the same revenue. For a ten dollar discount it would be 676,285, and for a fifteen dollar discount (33%) you would need 789,000 fans to buy the PPV just to break even. To use a real world example, the Benson Henderson/Frankie Edgar rematch got roughly 200,000 buys, which was well below average even though it doesn't fit your discount criteria because it featured a title fight (which presents another problem in that you can never really predict which PPVs will be below average. Look at Jon Jones vs. Vitor as another example). At 200,000 you would need twenty five thousand new viewers to break even at a five dollar discount, fifty seven thousand at ten dollars and at a fifteen dollar discount you would need 100,000 new viewers (a 50% increase) just to break even. Do you think if there are 25,000 people out there who know enough about MMA to be interested in a fight between two lightweights, who also watch enough MMA programming or are hardcore enough to realize that 40 dollars is less than the usual rate, and who are also willing to buy a PPV at 40 dollars but not at 45 dollars? Do you think they could generate 100,000 new buys from these same people at 30 dollars? I'm not so sure they could. The problem is that if your discount is too cheap you won't get enough extra buys to balance out the loss of revenue. The only way to get a significant amount of new PPV buys would be through deep, deep discounting. If you advertised that PPV at 20 dollars you would only need 450,000 buys to break even (which is still less than average)but then if the plan doesn't work and you only get a few extra thousand buys your revenues for that fight suddenly get cut in half. The deep discounting sounds reasonable enough to try out, but there are two problems: first, you can't truly predict the number of buys a PPV will receive, and secondly, you run the risk of people simply shifting the money they would have spent on the big name, full price ppv's to the discounted ppv's. Even if this person buys two half-priced ppv's instead of 1 full-priced ppv you still end up losing money because you now have to put on two events to generate the same revenue as you had before with only one event.

cman- March 13, 2013 at 8:46 am

Further if I did make honest assessment:
GSP = price max.
Hendricks = about a 33.95, max,
Do we average or go with knowing GSP is largest draw, max it. Which again, future assessments Hendricks looks better on another's back.

cman- March 13, 2013 at 8:39 am

I'm not arguing take home money via larger sales. That's just market equilibrium. But your talking about indexing a fighter over a 4-6 fight contract.
Using Hendricks as an example, 6 fight contract, 4 fights ago was the invisible man, now has buzz and has chance to be in a title fight next fight. That said, he still won't sell a single PPV on his own. GSP would carry that card, but you have to index Hendricks for a payout. He would meet even some of your ideas, but if it was my checkbook, I wouldn't want to pay him according to most indexes I could create, and his PPV numbers until now are based off other fighters inflating him, neilson is only high during main events. I couldn't make an honest assessment that is fair value that doesn't insult him, and cause contractual nightmares.
I like the concept, in the UFC I am having a hard bridge to actual practice.

O Chan- March 13, 2013 at 8:24 am

@cman - As far as fighters getting a piece of the PPV pie, one could argue that lowering the price could result in increase buys that may net out the same or more total dollars. Fighters were indexed based on the buy-rate when they were featured on a main/co-main event. You could also go even further and look at Nielsen ratings for free-TV events that may boost their price tags. I would even say how they finish fights or bonuses could also come into play as well.
-
@Pen Fifteen - Your mom likes it just fine.

cman- March 13, 2013 at 8:19 am

Interesting article.
How would you index fighters? Outside title vs no title ? That would become public knowledge quickly as certain cards become cheaper anyway by reversing the math.
Legally how would you contractually do this? as fighters get a piece of PPV and their stock is a variable component and can radically change fight by fight.

Pen Fifteen- March 13, 2013 at 7:51 am

You may be good at math, but I bet you suck at driving and have a tiny penis.